Trade Wars and the Land of the Rising Sun

April 26, 2018  | by Mark J.P. Anson

Industry Knowledge | Market Commentary

Like the very cute child who put her hand to the TV set in Steven Spielberg’s classic ghost story, Poltergeist: They’re here… “They” are the trade wars that we have all been reading about in the financial press. The trade wars began with the United States and China but have now expanded to Japan as well.

Let’s recap for a moment. Putting politics aside, it is important to remember that President Trump campaigned on an “America First” platform. He made clear his intentions long before he ever took the Oath of Office or entered the Oval Office. But Trump is not alone in his protectionist stance. Brexit was a clear demonstration of “U.K. First”—the protection of U.K. jobs by withdrawing from the European Union. And Russia is pursuing a Russia First /Putin First trade policy—it is very hard to separate the identity of Putin from Russia.

Importantly, this leaves the door wide open for China to assume a larger role in setting global economic policy. With Russia, the U.S., and the U.K. all looking inwardly, emerging market nations need another superpower to turn to for foreign direct investment, infrastructure, and other economic support. I will come back to China in a moment.

I recently returned from a trip to Japan, and the nation’s mood towards President Trump’s trade policies is definitely somber. While I was in Japan, President Trump met with Prime Minister Shinzo Abe back in the United States. Having dined with the Prime Minister, President Trump released a tweet after the meal indicating that he intended to maintain the U.S.’s withdrawal from the Trans-Pacific Partnership Agreement. This is the trade agreement that allows the free flow of goods back and forth between the U.S. and Japan without any restrictions, tariffs, or other economic barriers. President Trump’s tweet was a blow to Japanese exports to the United States.

Potentially, President Trump may sense a weakness in the current Abe cabinet. Unfortunately for the Japanese Prime Minister, his administration is mired in several scandals; two of which unfolded while I was in Japan. First, Abe’s powerful finance minister, Junichi Fukuda resigned his office over allegations of sexual harassment. Vice Minister Fukuda was caught on tape making inappropriate comments to a female reporter and those comments were subsequently posted on the internet. A second scandal erupted relating to Mr. Abe’s wife with respect to the purchase of government land at deeply discounted prices. In this latter case, government officials falsified documents in a clumsy and illegal attempt to protect the Prime Minister and his wife. As a result, Prime Minister Abe’s public rating has plunged to its lowest level of 31 percent, raising the very real possibility that Mr. Abe will not survive the September elections in Japan.

With the state of Japan’s political travails in mind, President Trump has all of the advantage on his side to apply trade restrictions that attempt to protect the U.S., to the detriment of Japan. But there will be repercussions. This takes us back to China.

China’s top diplomat, Wang Yi, met with Prime Minister Abe last week to engage in the first China/Japan economic policy summit in a decade. Importantly, this summit focused on trade wars and the two nations issued a joint statement that “any trade war poses a threat to global growth and the two nations will increase their efforts to cooperate.” Without naming the United States, this statement was squarely directed at President Trump’s tariff war. Furthermore, the two nations stated that Japan would be a valued partner in China’s “One Belt, One Road” infrastructure network in Asia, the Mideast, and Africa. Importantly, both Japan and China have been caught up in the steel and aluminum tariffs implemented by the Trump Administration in March. And, Japan is the only major ally of the United States that has not been granted an exemption from U.S. steel and aluminum tariffs—which were meant to be directed at China.

Yet, for all of the sabre rattling over tariffs, the impact to economic activity is small. The table below shows the impact on the tariffs with respect to global trade. We can observe that for the U.S., China and Japan, the reduction in GDP is small.

CH1-TradeWars-GDP-Impact

In times of war, blockades are what enemy nations impose upon each other to restrict the flow of goods. And, in times of peace, tariffs accomplish the same objective—but are self-inflicted. Nonetheless, we see only a small impact on GDP growth in the U.S., China, and Japan. In fact, the International Monetary Fund (IMF) last week re-affirmed its 2018 forecast for global GDP growth at 3.9 percent. Consequently, while we continue to monitor these protectionist policies—and the potential to ratchet up the rhetoric— we are sticking with the game plan – maintaining our preference for an overweight to equities with a bias to move toward neutral over time.

Authors

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Mark Anson is the Chief Investment Officer of Commonfund and Chairman of the Board of Commonfund Capital Inc. and Commonfund Asset Management Company. Previously, he was the President and Chief Investment Officer for the Bass Family Office which was recognized as Family Office of the Year for 2014 and 2015. He was the President & CEO of Nuveen Investments and Nuveen Alternative Investments, a full-service asset management company with over $250 billion in assets under management. Prior to Nuveen, Mark served as the Chief Executive Officer and Chief Investment Officer for the British Telecom Pension Scheme (BTPS), the largest institutional investor in the UK with assets of £65 billion. In addition, Mark was the CEO of Hermes Pensions Management in London, a £55 billion asset management company that is wholly owned by the BTPS. Prior to joining BTPS, he served as the Chief Investment Officer of the California Public Employees' Retirement System, the largest pension fund in the United States with over $300 billion in assets. Mark is currently on the Investment Advisory Council of the UAW Pension Fund. He also serves on the Board of the Northwestern University School of Law, the Toigo Foundation, and the Board of the Chartered Alternative Investment Association. He is a past member of the Board of Governors for the CFA Institute. Mark has published over 100 investment articles in professional journals and has won three Best Paper Awards. He is also the author of five financial textbooks including the Handbook of Alternative Assets, which is the primary textbook used for the Chartered Alternative Investment Analyst program. Mark earned a B.A. in Economics and Chemistry from St. Olaf College, a Ph.D. and Masters in Finance from Columbia University Graduate School of Business, and a J.D. from Northwestern University School of Law, all with honors. He has also received several industry awards in recognition of his leadership in asset management. Last, Mark has earned the Chartered Financial Analyst, Chartered Alternative Investment Analyst, Certified Public Accountant, and Chartered Global Management Accountant professional degrees, and he is a Member of the Law Bar of New York and Illinois.
Mark J. P. Anson, PhD
Chief Investment Officer, CFA, CAIA, CGMA

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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.